The European Commission adopted regulations implementing the European Market Infrastructure Regulation (EMIR) to ensure that information on all European derivative transactions will be reported to trade repositories and be accessible to supervisory authorities, including the European Securities and Markets Authority (ESMA), to give policy makers and supervisors a clear overview of what is going on in the markets. EMIR also requires standard derivative contracts to be cleared through central counterparties as well as margins for uncleared trades. EMIR and the implementing regulations and standards establish stringent organizational, corporate governance and prudential requirements for these central counterparties.
The regulations and standards were developed by ESMA and adopted by the Commission without modification. EMIR entered into force on August 16 2012. The regulations and standards implementing EMIR will enter into force on the 20th day following publication in the EU’s Official Journal. As with other EU regulations, their provisions will be legally binding on all Member States from the day they enter into force without implementation into national law.
Under the implementing regulations, central counterparties must have a sound framework for the comprehensive management of all material risks to which they may be exposed. They must establish documented policies and systems that identify, measure, monitor and manage such risks. In establishing risk-management policies, central counterparties must structure them in a way as to ensure that clearing members properly manage and contain the risks they pose to the central counterparty.
Moreover, central counterparties must take an integrated and comprehensive view of all relevant risks, including the risks they bear from and pose to clearing members and, to the extent practicable, clients. The governance arrangements must ensure that the board of the central counterparty assumes final responsibility for managing the risks. The board must determine and document an appropriate level of risk tolerance for the central counterparty and the board and senior management must ensure that the procedures and controls are consistent with the risk tolerance and risk bearing capacity and that they address how the central counterparty identifies, reports, monitors and manages risks.
A central counterparty must ensure that the risk management function has the necessary authority,
resources, expertise and access to all relevant information and that it is sufficiently independent from the other functions of the entity. The chief risk officer of the central counterparty must implement the risk management framework, including the policies and procedures established by the board.
Under the Commission regulations, a central counterparty must have adequate internal control mechanisms to assist the board in monitoring and assessing the effectiveness of its risk management procedures and systems. The internal controls must include sound administrative and accounting procedures, a robust compliance function and an independent internal audit and validation or review function. Ultimately, a central counterparty must prepare an annual financial statement and have it audited by an outside independent audit firm within the meaning of the Audit Directive (2006/43/EC).
A central counterparty must also establish a permanent and effective compliance function which operates independently from the other functions of the entity. There must be a chief compliance officer with a duty to regularly monitor and assess the effectiveness of the measures put in place and the actions taken to address any deficiencies in the central counterparty’s compliance with its obligations. The chief compliance officer must also establish procedures for the effective remediation of instances of noncompliance.
The remuneration policy of the central counterparty must be designed to align the level and structure of remuneration with prudent risk management. The policy must account for prospective risks as well as existing risks and risk outcomes. Pay out schedules must be sensitive to the time horizon of risks. In particular in the case of variable remuneration, the policy must take due account of possible mismatches of performance and risk periods and ensure that payments are deferred as appropriate. The fixed and variable components of total remuneration must be balanced and consistent with risk alignment.